YUM! Brands, Inc. (YUM)

Q2 2010 Earnings Call Transcript

July 14, 2010 9:15 am ET

Executives

Tim Jerzyk – SVP, IR

David Novak – Chairman, CEO & President

Rick Carucci – CFO

Analysts

Jeff Omohundro

David Palmer – UBS

John Glass

Joe Buckley

Jake Bartlett

Jeffrey Bernstein

Jonathan Komp [ph]

Larry Miller

John Ivankoe

Tom Forte – Telsey Advisory Group

Keith Siegner – Credit Suisse

Linda Farquhar – Friess

Sara Senatore – Sanford Bernstein

Mitchell Speiser – Buckingham Research

Presentation

Operator

Good morning. My name is Jasper and I will be your conference operator today. At this time, I would like to welcome everyone to the 2010 second quarter’s earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be question-and-answer session. (Operator instructions)

I would now like to turn the call over to Mr. Tim Jerzyk. You may begin sir.

Tim Jerzyk

Thanks, Jasper. Good morning, everyone and thanks for joining us today on our call. The call is being recorded and will be available for playback. We are broadcasting the conference call via our website at www.yum.com. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.

I’d also like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC.

In addition, please refer to the investors section of the Yum! Brands’ website to find disclosures and reconciliations of any non-GAAP financial measures that may be used on today’s call.

Finally we’d like you to be please be aware of an upcoming Yum! Investor Event, where you’ll have a great opportunity to meet leadership team from one of our businesses. September 21, we will host our Yum! China Investor Conference in Shanghai. Space is limited, so please notify us if you’re interested in attending as soon as possible.

Also on Tuesday, October 5, our third quarter earnings will be released and a conference call will be held the following morning of October 6.

On our call today you will hear from David Novak, Chairman and CEO; and Rick Carucci, our CFO. Following remarks from both, we will take your questions.

Now I’ll turn the call over to David Novak.

David Novak

Thank you, Tim and good morning, everyone. I’m pleased to report we are raising our full-year 2010 EPS growth forecast to 12% based on our strong second quarter and first half performance. Our second quarter EPS growth of 17% before special items was fueled by profit growth in each of our three divisions.

We were particularly pleased with our business in China which reported robust profit growth of 33% driven by same-store sales growth, margin improvement and continued unit development. In the U.S. we were also pleased to see significant improvement in operating profit despite flat same-store sales.

Our primary focus is to drive same-store sales growth balance of the year given the challenging consumer environment. At Yum! Restaurants International we increased system sales 4% prior to foreign currency translation benefit. We expect stronger sales and profit growth for the balance of the year at YRI.

Now let me take you through our key strategies and trends for each of our divisions. First, I’m obviously very proud of our China team’s performance. Same-store sales grew by 4% and units expanded 12%. Our China division generated operating profit growth of 33%.

Through the first half of this year our China division’s profit growth has been 35%. New unit development continues to be the major driver of our growth and we remain the largest U.S. retail developer in China. We’ve opened 155 new units in our first two quarters and expect to open about 475 this year. Our China new unit returns continue to be the best in our business.

Now let me share with you a few highlights from each of our leading brands in China. Let’s start with KFC. We just opened our 3,000th KFC in June and as you know we’re in over 600 cities with average unit volumes of $1.4 million. KFC continues to be the largest western QSR concept in mainland China.

We have three key initiatives to grow our business and leverage our assets. First, KFC breakfast is in virtually all of our restaurants. We are opening at 6 A.M. and breakfast now makes up 10% of transactions. Next is delivery, which is now available in 126 cities and nearly 1,300 units. Last, our 24-hour operations initiative is generating incremental sales and is in now about 1,000 restaurants.

Pizza Hut Casual Dining continues to be the leading western casual dining concept in China with 469 units in a 122 cities. We expect to open 63 Pizza Hut Casual Dining restaurants this year, which is up from 55 last year.

You may recall that beginning last year we slowed the growth of this concept substantially while we repositioned our menu. With the success we’ve had we’ve begun to increase development in Tier 1 to 3 cities.

Our new menu strategy continues to drive double-digit same-store sales growth. We offer a broad variety of entrées including beef, chicken and rice dishes along with appetizers, beverages and deserts. We are having solid success building a true casual dining concept with everyday affordable value.

We also continue to invest behind the development of our emerging brands. Pizza Hut Home Service in the home delivery category now has over 100 units in 11 cities. East Dawning, our Chinese fast food brand, continues to progress as we drive for scalable economics. Additionally, we own 27% of Little Sheep, the leading brand in the hotpot category, which is the largest casual dining concept in China.

In summary, we are very pleased with the progress we are making, executing our China strategy to build leading brands in every significant restaurant category.

Next, Yum! Restaurants International, where our strategy is to drive aggressive expansion and build strong brands everywhere. Similar to our China business, new unit development is a key driver for growth.

Our Yum! Restaurants International growth strategy differs from China and that nearly 90% of our 284 new units so far this year that we have developed, have been developed by our strong network of franchises. In fact over 85% of the nearly 14,000 traditional restaurants in this division are franchise units, which generate a steady growing stream of franchise royalties. We expect to add about 900 new units for the full year.

Our second quarter system sales grew 4% excluding foreign currency translation, while same store sales were up 1%. Overall, we drove 7% operating profit growth excluding foreign currency translation for the quarter.

Based on the success we’ve had in China, we are aggressively going after sales layers at YRI. In particular, KFC our largest concept in Yum! Restaurants International is making major progress on driving value. Value menus are in place in all our key markets and we’ll be expanding further this year.

Our Krushers line of frozen beverages continues to expand and is now available in over 2,100 stores and over 35 countries. Our KFC breakfast initiative, which we call KFC A.M., also continues to grow.

Pizza Hut continues to make progress elevating its brand offering and strengthening its position as the leading western casual dining concept with everyday affordable prices. While we have weaker transaction trends due to Pizza Hut’s higher average guest check, we are encouraged by the progress we are making with our expanded menu, including a wider variety of appetizers, beverages, entrées and desserts.

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